The impact of fiscal decentralization on economic development

Mykola Pasichnyi,Anton Nepytaliuk,Tetiana Kaneva,Maksym Ruban

doi:10.21511/imfi.16(3).2019.04

Abstract

In this article, updated approach to assess the impact of fiscal decentralization on economic development is offered. The relationship between the proper level of fiscal decentralization and economic growth for 27 advanced and emerging economies in Europe from 1992 to 2017 was evaluated using panel data. In the EU members, Belarus, Georgia and Ukraine expenditures decentralization was more essential than revenue decentralization. The vast majority of the counties from Central and Eastern Europe have increased the level of fiscal decentralization since 1992. It was found that revenue decentralization was associated with lower growth rates, while expenditures decentralization could slightly encourage economic development. The overall decentralization indicator adversely affected the growth, but that interconnection was not robust. The empirical investigation showed significant role of demographic structure and sustainability to ensure economic development. The authors propose the statements for the local authorities to develop the methodical bases of the fiscal policy’s design. In the survey, a balanced approach to the tax and public spending policy’s preparation and planning is presented.

Highlights

The influence of fiscal policy on economic welfare is crucial but rather ambiguous
We evaluated the impact of fiscal decentralization on economic development by simultaneously using a set of decentralization measures
In general, the EU countries and a few post-Soviet states in Eastern Europe were essentially more expenditures federalized than revenue decentralized

Summary

Introduction

The influence of fiscal policy on economic welfare is crucial but rather ambiguous. In the second half of the XXth century, decentralization has turned into the worldwide trend in the area of public finance. The OECD countries have become the pioneers in the mentioned process, giving their local authorities a wide range of fiscal powers and abilities. Taking the situational weakness of the institutional framework into account fiscal decentralization has been considered as a challenge for emerging economies. Regarding the explicit effects in the field of public financial governance, the decentralization’s impact on economic development has been already assessed by enormous group of scientists. The local governments’ fiscal autonomy is the obligatory prerequisite for economic liberty. If the quality of public goods, produced by the local authorities, is poor, the taxpayers are disinterested in the high level of fiscal decentralization. The divergence between declared, potential and achieved level of the region’s financial capacity under conditions of decentralization is an important object of the study both in advanced and emerging economies

Objectives

Findings

Discussion

Conclusion